Unit Trust industry stable and secure

Charumini de Silva

The Unit Trust industry is stable and secure for investors as inflation and interest rates decreased with the national economy recording a positive growth.

The mass market has realized the potential of the stock market since the Unit Trust is one of the safest financial instruments where people could invest in, while enjoying a higher return on their investment.

With the steady growth and economic developments taking place in the country the former volatile situation in the financial sector has ceased. At present there is a positive impact that Sri Lanka will experience a rapid economic growth within the next few years.

Unit Trusts were introduced to Sri Lanka in 1992. However due to the war, which prevailed for over three decades impeded the growth of the financial sector and the country was unable to promote Unit Trust Funds among local and foreign investors.

Countries such as China and India also launched Unit Trusts at the same time when Sri Lanka introduced Unit Trust, but they made speedy advances from it. Since peace and stability has returned to the country; Sri Lanka too could make headway in the Unit Trust industry.

The Colombo Stock Exchange (CSE) together with the Securities and Exchange Commission of Sri Lanka (SEC) has modified its laws and regulations to encourage the Unit Trusts. Previously limited foreign participation is now available for Unit Trusts and it has already benefited the industry.

Majority of the public has not understood the concept of the Unit Trust due to lack of awareness. However, during the post war scenario the investors have shown a commendable response. Unit Trusts are an alternative financial instrument with less risk and it is a preferred mechanism for householders to invest in the stock market or in debt market.

The public are slowly identifying the potential in the Unit Trust industry and this will be an excellent gateway for companies that wish to list on the CSE to raise capital.

An investor can enter into the unit trust market with a small amount of capital. Even for a small investor it is easy to enter into the market since the investor need not have to select in which company the investment should be made and need not have a frequent knowledge about the capital market.

These funds are managed by fund managers. The fund managers are under the purview of the SEC. There is much potential for the fund managers to manage the pension industry and high net worth fund managers. These funds could be converted from savings to investments through professional fund managers.

The first unit trust was launched in the city of London in 1868 and from small beginnings this movement has snowballed to a great extent worldwide in many countries. This introduced the idea of selling a “unit” or participation in a trust fund which can be traced in Great Britain to the foreign and Colonial Government Trust, formed as an unincorporated trust in the same year.

The significant features to be noted in a Unit Trust are:

A Trust Deed is executed between a licensed Fund Management Company (FMC) and a reputed financial institution called Trustee

The management of this trust fund is placed in the hands of the FMC which is licensed by the Securities and Exchange Commission of Sri Lanka (SEC) with a minimum issued capital of Rs 25 million.

Investing public invest in the trust through the FMC and the investors capital is held by the trustee until it is withdrawn by the investor. Investments could be in joint names and also in the names of minors.

Investors in the trust are allotted ‘units’ for their investments based on the selling price calculated at the end of the day. This pricing mechanism is called forward pricing. The investors are provided with a Unit Certificate commencing the investment. In more recent times the units are issued in a script less format.

There is no par value for units although usually initial offer price of a trust fund is fixed at Rs 10 per unit. The unit value is based on the Net Asset Value (NAV) of the securities held by the trust on the date of valuation.

FMCs’ publish in newspapers the buying and selling prices of units of a particular trust which gives an indication of the transaction price to the investors in Unit Trusts.

The number of units outstanding in a trust can vary up or down depending on the investor activities in the trust fund. The unit trust funds operating in Sri Lanka are open ended, close ended and listed funds and capable of issuing any number of units without any limitation for open ended funds and limited number of units for close ended funds.

FMC maintains the investor’s personal details and the transaction details to provide accurate information and service to investors in the trust. When the investors apply to withdraw their investments FMC verifies with the details and check their identity before payments are made. Usually investors can withdraw their funds within a period of 3 - 4 days from the date of their withdrawal application.

The value they realize for their units is based on the appropriate managers buying price for that transaction.

The trustee, and the SEC monitors the activities to ensure all transactions are within the provisions of the deed and related securities law in the country.

FMC declare dividends based on income realized and accrued to keep the investors to enjoy a return annually.

However, some funds are long-term growth oriented funds and may not declare dividends on a regular basis. The growth is achieved due to the nature of the asset class in which trust fund makes its investments, such as shares of growth companies.

Unit Trust industry in Sri Lanka

In Sri Lanka the unit trust concept was first introduced in 1991 when the share market was in its early stages and particularly soon after foreign investors were allowed to invest in the Sri Lankan stock market. Initial funds launched in 1991 - 1992 were balanced funds which primarily invest in share market and fixed income securities.

Public awareness about unit trusts in Sri Lanka is found to be lower since the formation of unit trusts in 1991. The Unit Trust Association of Sri Lanka has conducted awareness campaign from time to time for the benefit of the public to know about unit trusts and to use them to save their money for their medium to long-term financial requirements.